The entrepreneur's biggest risk may be retirement

As founder of Going GreenHouse, a cleaning service that uses natural products, April Prothero, 32, faces a challenge common to entrepreneurs.

She has to invest in expanding her Chandler, Ariz.-based company, which has 12 full- and part-time workers, and reserve some cash for emergencies. At the same time, she must save for retirement. Prothero, who is single with no dependents, put $2,000 toward that goal last year, but her aim this year is to sock away about $15,000 in a Simple IRA.

"I think it will be exciting to feel confident that I'll be able to retire when I want to," said Prothero, who expects Going Greenhouse to generate about $150,000 in revenue this year.

Prothero has been working with Shanna Tingom, a financial advisor for Edward Jones based in Gilbert, Ariz.

Tingom, who specializes in advising entrepreneurs, said many have trouble committing to saving regularly for retirement because they have an unsteady income or need to invest in their business. And because they are not part of corporate 401(k) programs, which make contributions to a retirement savings plan automatic, they tend to put it off.

"When you own a small business, everything kind of comes before saving for retirement," Tingom said. "They may think about it, open an account—but they don't set up a plan and really contribute to it."

Others don't save because they're in denial.

"There's a misconception with a lot of small business owners that 'my business is my retirement—I will grow the business, sell it and retire,' " Tingom said. Unfortunately, they don't always realize that the market may not be hospitable at the time they want to sell their firm, or their business isn't worth what they expected. In some cases, it's not salable at all."

"When you own a small business, everything kind of comes before saving for retirement."-Shanna Tingom, Edward Jones financial advisor

The entrepreneur's unique Social Security crisis

An underlying issue is that many entrepreneurs take full advantage of business-related write-offs to reduce taxable income, thus lowering their Social Security payments. Tingom encourages those who are slow to save for retirement to request a Social Security statement from the Social Security Administration, so they get an accurate sense of what their payments are likely to be. Often, they're shocked by how low the payments will be. "For most of them," she said, "it's astounding."

Research released last year by the Small Business Administration Office of Advocacy found that, on average, small business owners anticipate retiring later (at age 72.6) than traditional employees (68.4).

For those who don't want to end up working long past their intended retirement age, establishing annual goals and saving regularly for retirement are key, according to financial advisors. Though it can be hard to save monthly, doing so quarterly or several times a year works for many business owners.

For self-employed professionals and freelancers with unsteady cash flow, an incremental approach may work.

"One way you can think about it is, any time I get that payment for a project, or for this particular engagement, I'm going to put 10 percent or 20 percent aside in this account," said John Morris, a managing partner of Boston-based Crestwood Advisors, whose client list include a number of entrepreneurs.

Windfall retirements

Advisors working with wealthy owners sometimes encourage them to make a major retirement contribution after a windfall, such as closing a lucrative deal.

"What I always counsel entrepreneurs is, you're very successful. You're taking risks. You've had a win. Let's take some chips off the table. Let's put them over here for your retirement," said Joe Patane, a Sarasota, Fla.-based certified financial planner and tax attorney who is a vice president at Plancorp.

To make sure his entrepreneurial clients stick to the plans they set up together, Patane meets with them and their spouses—ideally every quarter. Some owners tend to be active dealmakers, so it's important to keep track of all of their sources of income, and losses, regularly.

"I make them disclose all of their little secrets," Patane said. "Getting all the facts is very difficult." He grills them on cash flow, and finds out about any extra funds and how his client plans to use them. Then, he said, he might say, "OK, Charlie, you have $200,000 that's not targeted for use in the next 12 months. Let's put the funds to work. Write the check today."

Setting up the right type of retirement account is important for entrepreneurs at any income level, Morris said, with the best bets for those seeking tax-deferred investment growth often being the SEP-IRA, Simple IRA or One-Participant 401(k).

"Those are going to be your optimal vehicles to set aside larger amounts," he said. However, he advises all owners to check with their tax accountant about the retirement plan that best suits their situation.

This year, the maximum contribution for the SEP-IRA is the lesser of 25 percent of compensation or $51,000. For a Simple IRA, it's $12,000, plus $2,500 for those 50 or over, and either a 2 percent fixed or 3 percent matching contribution.

The One-Participant 401(k) has a maximum individual contribution of $17,500, or $23,000 for those 50 and over. One-person businesses can also set up a profit-sharing plan that lets them tuck away 25 percent of profits annually. This is a tax deduction for the business. An owner's total contributions to the account, not including catch-up payments, can't exceed $51,000 for 2013.

A disciplined approach to contributing can pay off. The SBA research shows that while small business owners 50 and over are less likely than employees to have pensions or retirement plans, including 401(k)s, they have "significantly greater" savings in IRAs and tax-deferred Keogh plans (which have been largely replaced by IRAs).

The bottom line

When allocating the retirement savings of entrepreneurs and owners, advisors say that, just as with other clients, they consider factors such as age and risk tolerance. They often recommend balancing the financial risks owners take with a more cautious approach to their portfolios, however.

"You may want to have your investment portfolio be not so risky," Morris said. His firm often suggests a globally diversified portfolio that, in addition to equities and bonds, may include gold, REITs and master limited partnerships.

He recommends getting tax advice before choosing an approach, though, saying, "This shouldn't be taken blindly."

—By Elaine Pofeldt, Special to CNBC.com

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